The worst kept secret in mining was unveiled earlier today when Rio Tinto confirmed it was in talks to acquire Arcadium Lithium, a move which could satisfy the needs of both companies, if the price is right.

Investors, who have grown wary of lithium and Arcadium's bold expansion plans at a time of low prices for the metal, were delighted with the news driving Arcadium shares up by 45% in Australia.

But whether it's a case of the mining giant stalking the smaller company or Arcadium looking for a funding partner, is unclear – perhaps a bit of both?

Rio Tinto is undoubtedly keen on lithium, but it appears to be equally true that Arcadium needs a partner with deep pockets to help meet the costs of multiple development projects.

It seems likely that Arcadium, through a series of mergers and expansion plans, has grown too quickly in a falling lithium market to find that it has bitten off more than it can chew.

Goldman Sach's view on Arcadium

Goldman Sachs, an investment bank, touched on Arcadium's funding challenge in a research note circulated last week which included a paragraph headed "Balance sheet risks remain if lower lithium prices persist."

The price of the metal has crashed by 60% since this time last year and by 85% over the last two years, driving high-cost producers out of the market, including Arcadium's Mt Cattlin mine in Australia.

Goldman Sachs said Arcadium expects to be able to fund its project pipeline from new debt facilities and free cash flow but "we note that on expected lithium pricing we see Arcadium still potentially testing covenants in the existing revolver (debt facility)."

The bank's research note also said that expansion projects were increasingly longer dated (being pushed out) with lithium carbonate production by 2028 expected to now total 170,000 tonnes down on an earlier forecast production rate of 250,000t which seems "unlikely before at least the early 2030s".

The cautionary opinion of Goldman Sachs led to Arcadium being assigned a neutral investment ranking, including a 12-month price on the ASX of A$5.35, a level comfortably passed today when the stock rushed up to A$6.29 before easing back to A$6.02.

Share price fall

It is the funding challenge which can be found in Arcadium's 70% share price fall from earlier this year as the Australian listed shares plunged from A$11.21 in January to A$3.30 last month, fuelling speculation that a deal might be needed.

Rio Tinto chief executive, Jakob Stausholm, stoked the merger fires three months ago when he said he wasn't looking at the current lithium price but what it would be like in the future.

"I couldn't care less about what the lithium price is in the next 12-months, I am more thinking about how will the market and demand be over the next decade or two," Stausholm said.

"Lithium is necessary in almost any construct of a battery, so there will be growth in lithium."

It's that confidence which can be seen in Rio Tinto's investment in the Rincon project in Argentina which is scheduled to produce its first metal by Christmas and plans to develop the Jadar lithium mine in Serbia despite local opposition.

Rumours

Rumours of a bid for Arcadium started to build in New York last Thursday with the US quoted shares in the company jumping by 14% with the upward trend continued when the Australia market opened today.

A series of media reports over the weekend did all but confirm that the two companies were talking, with Rio Tinto eventually flushed into the open.

The official statement said Rio Tinto "confirmed that it has made an approach to Arcadium Lithium regarding a potential acquisition".

The approach was said to be non-binding with no certainty that a transaction would proceed.

Over the past month, Arcadium has been promoting its development plans and investment appeal as a business with deep exposure to the North American market in particular, hosting tours of its Bessemer City project in North Carolina and Bécancour in Canada.

Tough market

Citi said after visiting Arcadium's North American operations that the company's "lithium hydroxide story remained intact" though the company acknowledged that the market is tough.

Macquarie Bank said last week that Arcadium was "standing against the winds," adding that it remained "in a heavy capex phase over the medium term".

Morgans, a boutique Australian broker, said last week when initiating coverage of Arcadium that its lower price was a good opportunity for investors to see-through near-term volatility in the lithium price ahead of a medium-term turnaround.

Stausholm obviously agrees about the outlook but also said in his late July comments about mergers and acquisitions (M&A) that they tend to not work out unless there are synergies.

Two of the obvious synergies with Arcadium are that it needs capital, which Rio Tinto can provide, while Arcadium's Olaroz lithium project in Argentina is just 60 kilometres from Rio Tinto's Rincon project.